Sunday, December 6, 2015

Can Additional Periodic Pice Band on BSE distort Pirce ?


Recently BSE Ltd (BSE) came  out with Additional periodic price band (Here) for stocks exclusively listed on BSE.

Every Stock traded on stock exchange has a price band, wherein it can be traded for a particular day (Except for stocks in Derivative segment). But now BSE has put a Weekly / Monthly / Quarterly and Yearly  price-band on all stocks listed exclusively on BSE. It means the stock cannot move up by certain percentage in that time frame. The price-band is mentioned below.

Securities with daily price band as
Weekly   Price Band
Monthly Price Band
Quarterly Price Band
Yearly Price Band
+/- 60 %
+/-100 %
+/-200 %
+/-400 %
+/- 30 %
+/-60 %
+/-100 %
+/-200 %
+/-20 %
+/-30 %
+/-60 %
+/-100 %
+/-10 %
+/-20 %
+/-30 %
+/-50 %

Please note that there is no restriction on fall in price, The price can fall by 100 % i.e,  the fall n share price can be up to 0.00 in a year.

Image result for bse logo

The Exchange quotes

"In order to enhance the market integrity and to prevent excessive price movement in the securities listed on its trading platform, BSE as a pre-emptive surveillance measure has an additional framework of periodic price bands in addition to the aforesaid daily price band framework. These additional periodic price bands shall be applicable to securities exclusively listed and traded on BSE Equity Trading Platform including securities listed on SME and SME ITP platform. The periodicity of these price band shall be weekly, monthly, quarterly and yearly"

The features of the additional periodic price-bands as per BSE are as follows

a) It is applicable only on Exclusively BSE listed stocks.
b) It will enhance market integrity.
c) It will prevent excessive price movement.
d) It is applicable to all stocks including SME and SME ITP platform.
e) It will help in surveillance mechanism on Exchange
f) Any up-move in S&P Mid cap Index will be adjusted in price-band by 2X
g) In-case of Corporate action, the price will be adjusted accordingly.

The added features cited by BSE are
a) It will reduce money laundering.
b) It may reduce volatility in such stocks.
c) It will reduce stock rigging.
d) They have also said that If there is upward change in daily circuit percentage of stock, the Additional price band will be increased, but if the circuit percentage of stock is decreased, the Additional Periodic price will remain the same. (Here)

But, There are many Drawbacks, which BSE needs to look after bringing in the additional price bands :

a) IT WILL DISTORT PRICE DISCOVERY : Additional periodic price bands will distort price discovery, because now, it does not matter, if the fundamentals of the company deserve to get re-rated on the higher side.
But if there is negative re-rating, the price can fall up-to 0.00 in a year.

b)  It will reduce volumes in such stocks : If the stock comes in the ambit of additional periodic price bands, It will be locked in upper circuit and thus it will reduce volumes in stock and also it will mean loss of interest by traders to trade in such stock.

c) Rise in Bid - Ask Spread : Such loss of Interest will also increase Bid / Spread in Stock, Which means such stock will have to pay liquidity premium.

d) Advantage for sellers : If the stock price reaches yearly price band, Then the price will not be able to move up, Hence it will compel the investors in such stock or some who can borrow such stocks, to go short on that stock as Price cannot not go up because of band for next 8-9 months. He can cover the position, when the price comes down. Also if he covers the short at the end of year, at same price, he will earn interest on money recd from short selling.

It will be more like Put option on stock, available at free of cost because of upper price band.

e) In-fact Gullible investors can be struck at circuit, waiting to sell at higher price and it may happen that they may not be able to sell the stock at higher price because of such bands.

f) Volumes will migrate to other exchange : Stocks which are listed on NSE exchanges does not fall under the ambit of Additional periodic price band, Hence Investors and Promoters will prefer listing on other exchange also, it may mean shift in volumes to other exchange

g) There are many stocks in price circuit limit everyday, but volumes can happen only at previous day circuit price of lower than that, The list will start getting bigger with time when many stocks will fall under yearly bands.

Some Things to Ponder for BSE

a) SEBI may have asked exchanges to find ways to curb money laundering  and Price Rigging on Stock Exchanges, But I don't think It is a proper way to curb money laundering or Price Rigging. Its just penalising all stocks for exchange incompetency. I am sure, Exchanges have resources to discover money laundering and Price Rigging by ways of Risk  management and also data mining. They have access to all order and trade data, KYC of Clients,  also they can ask for depository data. I am sure mining that data will lead not only to cases of Money laundering , price Rigging but also Front Running. Also new listing regulation can make Exchange more powerful in getting information from Companies also.

b)Why NSE has not put Additional periodic price Bands in place ?

c) Volatility is expected in trading, Exchange is not in business in reducing volatility, but they have put in place proper margin and Risk Management to take care of any eventuality. Volatility is because of uncertainty, Exchange can try only smothering  price discovery process.

d) Price of stock changes with change in Fundamentals and Sentiments. In a bullish scenario, if a company is doing well, Investors will buy the stocks, but if they are struck with price band and then there is change in sentiment ? 

e) SME stocks and SME ITP stocks are on different board, here exchanges may not have sufficient data on such companies, and it may be more difficult to bring in transparency in such stocks because of small size, but Main board has many more laws to keep tabs on company.

Additional periodic Price bands from the academic point of view :

a) Exchange has put in an additional impediment in price discovery process of stock. They have tweaked with market micro-structure, which is biased to sellers.

b) Many Stocks were transferred in PCAS (Periodic call auction) in the past, but SEBI had to later relaxed the criteria for PCAS stock, which meant most stock were out of the ambit of PCAS.

c) I am not aware if BSE has done some research work with the help of academician before implementing Additional price band. If at all, it is done, It can put it in public domain.

d)  Will Additional price band, compel companies to list on NSE, no matter if that means increasing compliance work. or Listing on NSE and doing away with BSE

e) Will Additional Periodic price band impact price discovery on upside ?

Looking at price and circuit data on BSE, I can pen few points 

a) BSE can enhance its surveillance to deal with price rigging, Money laundering and Front running. (In-fact it can take help of academicians and also NISM ( A initiative of SEBI) in dealing with huge data.

b) Exchange may lose volumes and more people will prefer to deal with stocks listed on NSE (Maybe many companies would then prefer to list only on NSE)

c) Investor may just watch rally in market and sit tight with stocks in circuit because of additional price band, later they may regret if there is change in sentiment.

d) BSE may keep additional price band for SME and SME ITP stocks and for others in the past they may reduce price bands to 2 %.

I guess BSE should not wake-up only after some high volumes stocks with institutional interest comes in Additional price Bands and they face wrath / Lobbying of such Institution. ( I guess Spicejet is nearing that level)

Till then on the softer side  " No Investor will be able to hold micro-cap Multibagger stocks in exclusively listed BSE stocks because of these rules "

I am highlighting this issues and this write up should be taken positively for my endeavor towards better price discovery and lesser Distortion of Prices in Market.

This is not a recommendation to anybody whatsoever to buy OR sell any share, but it is my thought process and views on this topic.

I welcome your critical comments and suggestions.

PS : I may have position in stocks or intending to take position in stocks falling under Additional periodic Price Band of BSE.


  1. Thanks for Updating Such Information.
    Very Informative.

  2. Not only nice post but BSE and SEBI has to take a proper action to remove this new periodic price band in specially listed for BSE scripts...there is no meaning to keep the rules stocks price can't determine actually by this type of rules and stocks with yearly price band reach may have huge and huge loss of public interest and volume and have a very bad impression in company price structure. SEBI and EXchange had taken very wrong call by implementing the same.i am very much agree with Jigam Gandhi... Eg if suppose some of the script reached is upper band price limit in jan month 2016 then the same script can not move till sept end 2016 its suppose a turnaround company but as its reaches price band of yearly say 100% it can't move further so los of vol to BSE and public will not take interest in the same script as price band already reaches at higher and it can't move further on...very very bad rule for a such a huge exchange BSE thinks to implement earliest they have to take a call and have to have remove the same rule of periodic price band.....

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